CDs will pay less with Fed lowering rates

The Federal Reserve gave them a big push on Tuesday, reducing the target rate for consumer loans and deposits by half a percentage point.

That's going to make it harder to find the kind of lucrative CD rates we've enjoyed for the past couple of years, when savvy savers could always find short-term CDs paying 5% to 5.5%.

How much harder?

It's too early to say.

Over the next month or so we'll have to keep a close watch on our extensive database of the best CD rates.

This week we found more than 40 one-year CDs paying a 5% or more APY -- the annual percent yield includes interest on the interest you earn. Three-dozen banks are paying that same great rate or more on two-year terms.

Much will depend on:

How desperate banks are for deposits. With well-heeled investors such as hedge fund managers practically refusing to finance mortgages, banks are being forced to raise the money they need the old-fashioned way -- from their depositors.

Whether online banks, the newest and most competitive purveyors of CDs, drop the great rates they're offering to attract new customers is presently unknown.

The Fed didn't do that because it thought you were earning too much on your CDs.

It was concerned that borrowers were paying too much for consumer loans, particularly mortgages.

The financial and housing markets are in turmoil because so many homeowners -- particularly those with poor credit and expensive adjustable-rate mortgages -- are defaulting on their loans.

Those losses have panicked many of the big institutional investors that provide billions of dollars a year for home loans, resulting in a dramatic drop in the amount of money available for mortgages.

With home sales and prices already falling in many parts of the country, economists warn that tight credit could be the final straw that pushes the economy into a recession.

The Fed can prevent that because it acts as the nation's super bank, lending money to all the commercial banks we deal with every day. When the Fed lowers rates, banks can obtain the money they need for consumer loans more cheaply.

That allows them to charge less for loans such as mortgages, encouraging us to borrow and spend more. This keeps the economy growing since two-thirds of our gross domestic product depends on consumer spending.

Lower interest rates will also mean lower monthly payments -- or at least smaller increases in monthly payments -- for millions of homeowners with adjustable-rate mortgages.

Unfortunately for savers, such a move also allows commercial banks to pay less for deposits -- such as CDs.